Friday’s rally was a nice change after last week’s volatile trading. Stocks roared ahead during Friday’s session, with the Nasdaq and S&P 500 jumping 3.39% and 2.29% in the first hour of trading.
I’m happy to see it, but I don’t think it’s a sign that the markets are out of the woods.
Inflation is running very hot, the Fed is going to continue its rate-raising policy, there’s still problems with the global supply chain, and the war in Ukraine is far from over.
Frankly, there’s no underlying narrative that would support the beginning of a long-term rally.
What happened on Friday was simply a technical rally correlated to the CBO Volatility Index (CBOE). Since late last year, traders have been eyeing the VIX, waiting for it to get to 35, and then jumping in to establish short-term mean-reversion trades.
I think Friday’s rally was nothing more than the beginning of another technical short-term rally that will likely give way to lower prices once traders have made a quick profit.
In this rally, some stocks – especially the one I have in mind today – have jumped too far too fast, and that’s how we’ll make this week’s triple-digit profit.
Robinhood Markets Inc. (HOOD) jumped more than 24% in early Friday’s trading on no news that would justify such a big move. Basically, retail traders are just piling on because the Reddit boards are chatting up the stock, and it looks like an easy target for a quick profit.
Long-term though, the company still looks like it’s in trouble.
Just a few weeks ago, the company released its first-quarter results for 2022, which included a total net revenue and transaction-based revenue decline of 43% and 48%.
Looking a little deeper into the revenue numbers, options, cryptocurrency, and equity revenue declined 36%, 39%, and 73%, respectively.
That’s a huge red flag for a company that relies of trading-related transactions for the majority of its revenue, and I think shares are going lower in the long run.
If shares of HOOD trade up to $11.00 by this Friday (May 20), I like buying the HOOD June 17, 2022 $9/$8 Put Spread for $0.30 or less. Plan on selling the HOOD June 17, 2022 $9/$8 Put Spread for a 100% profit or if shares of HOOD close above $11.50.
|Editor’s Note: This form of trade is referred to as a Bear Put Spread. If you are unfamiliar with this style of trading, reach out to your broker or consult the below resources:|
Don’t forget to submit your watchlist stocks to me by Thursday morning. I’ll be recording another Buy, Sell, or Hold this week, so reach out to my staff at email@example.com with your picks.
You’ll receive my analysis and more Friday morning. Until then…